Q1: What area of law does Auerbach v. Bennett primarily address?
Corporations
Q2: What was the central legal issue in Auerbach v. Bennett?
When a special litigation committee of disinterested directors recommends dismissal of a shareholder derivative suit, to what extent may a court review that decision and on what grounds may it be set aside?
Q3: What rule did the court apply?
Under New York law, the business judgment rule shields a corporation's good-faith, disinterested decision about whether to pursue or terminate litigation. When a board delegates that decision to a special litigation committee composed of independent directors, judicial review is limited to whether the committee (1) was disinterested and independent, (2) acted in good faith, and (3) employed reasonable, adequate investigative procedures and bases for its conclusions. If those prerequisites are satisfied, courts may not review the committee's substantive evaluation of the merits or the wisdom of its decision to dismiss the derivative action.
Q4: What was the court's holding?
The Court of Appeals held that the SLC's decision to terminate the derivative action is protected by the business judgment rule, and courts may not inquire into the merits of that decision when the committee is independent, acted in good faith, and conducted a thorough, reasonable investigation. Judicial scrutiny is confined to those threshold procedural and independence inquiries; if they are met, dismissal is appropriate.
Q5: Why is Auerbach v. Bennett significant?
Auerbach v. Bennett is the leading New York authority on the judicial review of special litigation committee decisions in derivative suits. It solidifies a deferential, process-focused framework: courts test independence, good faith, and the adequacy of investigation, but do not reach the merits. The case is frequently paired with Delaware's Zapata decision to illustrate divergent approaches—New York eschews a second-step merits review that Delaware permits. For students, Auerbach is essential to understanding the business judgment rule's reach, the architecture of SLCs, the evidentiary showings required to dismiss derivative suits, and the practical design of investigations that will withstand judicial scrutiny.